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Background

The LODR (Amendment) Regulations, 2018 based on the recommendation of the Kotak Committee brought many changes on corporate governance. These changes included the requirement of annexing a secretarial audit report for both the listed entity and its material subsidiary in a specified format. Regulation 24A was inserted to be effective for the year ended on March 31, 2019.

SEBI vide its circular dated 8th February, 2019[1], specified the format for annual secretarial compliance report which is required to be annexed to the annual report for the financial year 2018-19. While the amendment does not refer to two separate reports i.e. annual secretarial report and annual secretarial compliance report, however, the circular provides for the same.

It states that listed entities and their material unlisted subsidiaries can continue to follow the format given under section 204 of the Companies Act, 2013 read with its rules (MR-3), the listed entity in addition, will still be required to annex a separate report i.e. ‘annual secretarial compliance report’ for due compliance under Reg. 24A.

Annual Secretarial Compliance Report (‘ASC Report’)

Giving of the ASC report will require the PCS to check the compliance of all applicable SEBI Regulations and circulars/ guidelines issued thereunder. Further, SEBI also suggests the issuance of guidance note by ICSI for enabling the auditors to conduct their audit both in letter and in spirit.

ASC report is required to be submitted within 60 days from the end of the financial year. This implies that for checking the SEBI compliances, PCS will have a fixed time frame of 60 days unlike for issuing MR-3 where they took more than the aforesaid time considering the large scope of compliance reporting.

Further, the material unlisted subsidiary of the listed entities will not be required to annex the ASC report in their annual report considering the fact that SEBI laws are not applicable on these subsidiaries.

Overlapping Scope –MR-3 and ASC Report

Even though the intent of inserting Reg. 24A was to strengthen the group oversight and improve compliance at the group level for listed entities, however, the format suggests an overlap between MR-3 and ASC Report.

Following are some of the differences between the two:

Sr. No

Basis of comparison

MR-3

ASC Report

1.

Relevant law

· Section 204 of the Act, 2013

· Reg. 24A of the Listing Regulations.

2.

Laws covered for reporting

· Companies Act, 2013 and its Rules;

· Secretarial Standards;

· FEMA and its applicable regulations (FDI, OCD and ECB);

· Depositories Act, 1996 and its Bye-laws;

· Securities Contracts (Regulation) Act, 1956 and its Rules;

· SEBI Act and Regulations and Guidelines made thereunder as applicable to the company;

· Specific laws applicable to the reporting entity.

· SEBI Act and Regulations and Guidelines, circulars, etc. made / issued thereunder as applicable to the company.

3.

Specific reporting

· Board constitution and changes made therein;

· Sending of notices and agenda for meetings;

· Capturing of dissenting views of the board member, if any;

· Presence of adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guideline; and

· Specific events and their compliance.

· Deviations from compliance requirements under various SEBI laws;

· Maintenance of proper records;

· List of actions taken by SEBI or stock exchange for any non-compliance with respect to compliance of SEBI laws either on the company, its directors, promoters and material subsidiaries;

· Action taken by the listed entity and comments on such actions taken by the PCS for the reporting year as well as for the past financial years.

4.

Scope

· Reporting on compliance requirements

· Reporting on compliance, observations as well as the action taken by the company.

· More in the nature of an action taken report.

5.

Regulatory Authority

· Ministry of Corporate Affairs

· Securities and Exchange Board of India (SEBI)

6.

Reportee

· Shareholders of the company

· Board of Directors who shall forward the same to the stock exchange.

7.

Applicability

· Listed companies and their Indian unlisted material subsidiary; or

· Public companies with paid-up share capital of Rs. 50 crores; or

· Public companies with turnover of Rs. 250 crores or more.

· Companies whose specified securities are listed.

8.

Inclusion in annual report

· Forms part the annual report

· The language does not suggest to be a part of the annual report

9.

Time frame for submission

· Till such time the annual report is approved by the Board of Directors

· Within 60 days from the end of the financial year.

Consequence for Non-Compliance

In case of non-compliance, the listed entity shall be penalised both under the Act, 2013 as well as the Listing Regulations. However, the consequence for non-compliance in case of the material Indian unlisted subsidiary is not clear since it is neither covered under the Act, 2013 nor the SEBI regulations (being unlisted). Probably the same may be prosecuted as per the prosecution of the parent company.

Conclusion

Looking at the above comparison, it is evident that the reporting under MR-3 is much broader in scope as compared to ASC report. Further, even though the ASC report is an overlap of the reporting under MR-3, the former is to be sent to SEBI.

Furthermore, the PCS certifying the ASC report shall undertake additional liability being the fiduciary of listed entity and shall also be liable for not reporting non-compliance of the SEBI laws. The limited time period allotted to the PCS for certifying the ASC report of the listed entity will also pose a challenge.